-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, SvN5l5Srm5vkgcWWO48Pvh9xt6+BK1dMj8y3eTF+ej19pXJj0fJOi2TI1ugolbCt dPkyb3hd9afrHXAie/n0qQ== 0000950144-97-005266.txt : 19970509 0000950144-97-005266.hdr.sgml : 19970509 ACCESSION NUMBER: 0000950144-97-005266 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19970331 FILED AS OF DATE: 19970508 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: SOFAMOR DANEK GROUP INC CENTRAL INDEX KEY: 0000873730 STANDARD INDUSTRIAL CLASSIFICATION: ORTHOPEDIC, PROSTHETIC & SURGICAL APPLIANCES & SUPPLIES [3842] IRS NUMBER: 351580052 STATE OF INCORPORATION: IN FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-12544 FILM NUMBER: 97597918 BUSINESS ADDRESS: STREET 1: 1800 PYRAMID PLACE CITY: MEMPHIS STATE: TN ZIP: 38132 BUSINESS PHONE: 9013962695 MAIL ADDRESS: STREET 1: 1800 PYRAMID PL CITY: MEMPHIS STATE: TN ZIP: 38132 FORMER COMPANY: FORMER CONFORMED NAME: DANEK GROUP INC /IN DATE OF NAME CHANGE: 19930328 10-Q 1 SOFAMOR DANEK GROUP, INC. FORM 10-Q 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q (Mark One) [ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended March 31, 1997 ----------------------------------------------- OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to ------------------- -------------------------- Commission File Number: 000-19168 ------------------------------------------------------- Sofamor Danek Group, Inc. - -------------------------------------------------------------------------------- (Exact name of registrant as specified in its charter) Indiana 35-1580052 - ------------------------------------------------------------------------------------------------------------ (State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification Number)
1800 Pyramid Place, Memphis, Tennessee 38132 - -------------------------------------------------------------------------------- (Address of principal executive offices) (Zip Code) (901) 396-2695 - -------------------------------------------------------------------------------- (Registrant's telephone number, including area code) - -------------------------------------------------------------------------------- (Former name, former address and former fiscal year, if changed since last report) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. [X] Yes [ ] No Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. 24,607,504 shares of common stock outstanding as of March 31, 1997 - -------------------------------------------------------------------------------- 1 2 PART I - FINANCIAL INFORMATION Item 1. FINANCIAL STATEMENTS SOFAMOR DANEK GROUP, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARES)
MARCH 31, DECEMBER 31, 1997 1996 ----------- ------------ ASSETS (UNAUDITED) Current Assets: Cash and cash equivalents $ 5,083 $ 2,830 Short-term investments 72 111 Accounts receivable--trade, less allowance for doubtful accounts of $1,605 and $1,589 for March 31, 1997 and December 31, 1996, respectively 74,498 70,031 Other receivables 19,241 15,813 Inventories 41,868 33,483 Loaner set inventories 15,217 14,123 Prepaid expenses 4,906 6,318 Prepaid income taxes 476 -- Current deferred income taxes 5,500 5,312 --------- --------- Total current assets 166,861 148,021 Property, plant and equipment Land 1,457 1,484 Buildings 10,828 11,261 Machinery and equipment 32,612 32,083 Automobiles 642 708 --------- --------- 45,539 45,536 Less accumulated depreciation (20,819) (20,026) --------- --------- 24,720 25,510 Investments 904 920 Intangible assets, net 83,801 83,426 Other assets 28,551 28,282 Non-current deferred income taxes 32,232 33,002 ========= ========= Total assets $ 337,069 $ 319,161 ========= =========
The accompanying notes are an integral part of the consolidated financial statements. 2 3 SOFAMOR DANEK GROUP, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (CONTINUED) (IN THOUSANDS, EXCEPT SHARES)
MARCH 31, DECEMBER 31, 1997 1996 ----------- ------------ LIABILITIES (UNAUDITED) Current Liabilities: Notes payable and lines of credit $ 57,441 $ 50,207 Current maturities of long-term debt 16,671 16,687 Accounts payable 11,308 7,332 Income taxes payable 2,080 3,898 Accrued expenses 33,319 38,770 --------- --------- Total current liabilities 120,819 116,894 Long-term debt, less current maturities 12,297 12,300 Deferred income taxes 112 121 Product liability litigation 47,015 48,000 Minority interest 2,667 2,020 Commitments and contingencies STOCKHOLDERS' EQUITY Preferred stock, no par value, 5,000,000 shares authorized, no shares outstanding Common stock, no par value 150,000,000 shares authorized: 25,293,412 and 25,094,277 shares issued (including 685,908 shares held in treasury) at March 31, 1997 and December 31, 1996, respectively 57,813 52,994 Retained earnings 110,818 98,044 Cumulative translation adjustment (745) 2,542 --------- --------- 167,886 153,580 Less: Cost of common stock held in treasury (9,985) (9,985) Unearned compensation (27) (54) Stockholder notes receivable (3,715) (3,715) --------- --------- Total stockholder's equity 154,159 139,826 --------- --------- Total liabilities and stockholder's equity $ 337,069 $ 319,161 ========= =========
The accompanying notes are an integral part of the consolidated financial statements. 3 4 SOFAMOR DANEK GROUP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) (UNAUDITED)
FOR THE THREE MONTHS ENDED MARCH 31, 1997 1996 --------- --------- Revenues $ 69,759 $ 54,218 Cost of goods sold 12,370 10,616 --------- --------- Gross Profit 57,389 43,602 Operating Expenses: Selling, general and administrative 32,698 25,988 Research and development 4,730 3,638 --------- --------- 37,428 29,626 --------- --------- Income from operations 19,961 13,976 Other income 76 980 Interest expense (1,176) (777) --------- --------- Income from operations before provision for and charge in lieu of income taxes 18,861 14,179 Provision for and charge in lieu of income taxes 5,470 3,582 --------- --------- Income before minority interest 13,391 10,597 Minority interest (617) (412) --------- --------- Net income $ 12,774 $ 10,185 ========= ========= Fully diluted net income per share $ 0.48 $ 0.39 ========= ========= Weighted average common shares outstanding 26,695 26,091 ========= =========
Note: Primary weighted average shares approximate fully diluted weighted average shares. The accompanying notes are an integral part of the consolidated financial statements. 4 5 SOFAMOR DANEK GROUP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOW (IN THOUSANDS) (UNAUDITED)
THREE MONTHS ENDED MARCH 31, 1997 1996 --------- --------- Cash flows from operating activities: Income before minority interest $ 13,391 $ 10,597 Minority interest (617) (412) --------- --------- Net income 12,774 10,185 Adjustments to reconcile net income to net cash provided (used) by operating activities: Depreciation and amortization 3,630 1,936 Provision for doubtful accounts receivable 70 47 Deferred income tax (benefit) expense 222 (1,372) Gain on disposal of equipment (7) -- Minority interest 617 412 Changes in assets and liabilities: Accounts receivable (6,771) (344) Other receivables (3,549) (4,414) Inventories and loaner set inventories (10,631) (1,120) Prepaid expenses 1,302 74 Prepaid income taxes (479) (1,322) Other assets (315) (14,724) Accounts payable 4,230 (943) Income taxes payable 44 5,829 Accrued expenses (4,590) 5,035 Product liability litigation (985) -- --------- --------- Net cash used by operating activities (4,438) (721) --------- --------- Cash flows from investing activities: Purchase of short-term investments (2) (10,856) Proceeds from maturities of short-term investments 33 12,067
The accompanying notes are an integral part of the consolidated financial statements. 5 6 SOFAMOR DANEK GROUP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOW (CONTINUED) (IN THOUSANDS) (UNAUDITED)
THREE MONTHS ENDED MARCH 31, 1997 1996 --------- --------- Payments for purchase of property, plant and equipment (1,549) (1,627) Proceeds from sale of equipment 14 Purchase of intangible assets (3,867) (992) Increase in notes receivable, other (23) -- Repayments of notes receivable, other 9 2 Payments for investment (55) -- --------- --------- Net cash used by investing activities (5,440) (1,406) --------- --------- Cash flows from financing activities: Increase in short-term borrowings 8,423 1,978 Proceeds from long-term debt 130 926 Repayment of long-term debt (41) (28) Proceeds from issuance of common stock 3,197 2,928 Capital contribution by minority shareholder 148 428 --------- --------- Net cash provided by financing activities 11,857 6,232 --------- --------- Effect of exchange rate changes on cash 274 (1,292) --------- --------- Increase in cash and cash equivalents 2,253 2,813 Cash and cash equivalents, beginning of period 2,830 11,330 --------- --------- Cash and cash equivalents, end of period $ 5,083 $ 14,143 ========= =========
Supplemental disclosure of non-cash investing and financing activities: - In 1997 and 1996, net income tax benefits of $1,622 and $1,429, respectively, were realized by the Company as a result of certain common stock options being exercised and vesting of certain restricted common stock, reducing accrued federal and state income taxes payable and increasing common stock. The accompanying notes are an integral part of the consolidated financial statements. 6 7 SOFAMOR DANEK GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) 1. Financial Statement Presentation The consolidated balance sheet as of March 31, 1997, the consolidated statements of income for the three months ended March 31, 1997 and 1996, and the consolidated statements of cash flows for the three months ended March 31, 1997 and 1996, are unaudited but, in the opinion of management, include all adjustments (consisting only of normal recurring adjustments) necessary for a fair presentation of financial position, results of operations and cash flows. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted. It is suggested that these consolidated financial statements be read in conjunction with the financial statements and notes thereto included in the Company's 1996 Annual Report on Form 10-K. 2. Inventories and Loaner Set Inventories Net inventories and loaner set inventories consist of:
----------------------------------------------------------------------------- March 31, December 31, 1997 1996 ----------------------------------------------------------------------------- Finished goods $34,401 $28,260 Work-in-process 4,761 2,961 Raw materials 2,706 2,262 ----------------------------------------------------------------------------- Net inventories $41,868 $33,483 ----------------------------------------------------------------------------- Loaner set inventories, net $15,217 $14,123 -----------------------------------------------------------------------------
7 8 3. Income Taxes The Company's effective income tax rates were 29.0% and 25.3%, respectively, for the quarters ended March 31, 1997 and March 31, 1996. The difference between the Company's effective and statutory tax rates for both 1997 and 1996 resulted primarily from the impact of certain elections made for U.S. tax purposes following the combination (the "Combination") of Danek Group, Inc. with Sofamor S.A. ("Sofamor"), and the subsequent reorganization of Sofamor from a Societe Anonyme (S.A.) under French law to a Societe en Nom Collectif (S.N.C.) in late 1993. At March 31, 1997, the balance sheet of the Company reflected a net deferred tax asset of $37,620. No valuation allowance was recorded since sufficient taxable income existed in available carryback periods to recognize fully these net deferred tax assets. During the first quarters of 1996 and 1995, charges in lieu of income taxes of $1,622 and $1,429, respectively, were recorded by the Company as a result of certain common stock options being exercised and vesting of certain restricted common stock. 4. Adoption of SFAS 128 In March 1997, the Financial Accounting Standards Board issued Statement No. 128 "Earnings Per Share" ("FAS 128"). FAS 128 establishes standards for computing and presenting earnings per share ("EPS") and replaces the presentation of primary EPS with a presentation of basic EPS. It also requires dual presentation of basic and diluted EPS on the face of the statement of operations and requires a reconciliation of the numerator and the denominator of the basic EPS computation to the numerator and the denominator of the diluted EPS computation. The Company will adopt the disclosure requirements of FAS 128 beginning December 31, 1997. The Company does not expect the adoption of FAS 128 to have a material impact on earnings per share when presented on a comparable basis. 5. Commitments and Contingencies The Company is involved from time to time in litigation on various matters which are routine to the conduct of its business, including product liability and intellectual property cases. PRODUCT LIABILITY LITIGATION Beginning in 1994, the Company and other spinal implant manufacturers were named as defendants in a number of product liability lawsuits brought in various federal and state courts around the country. These lawsuits allege that plaintiffs were injured by spinal implants manufactured by the Company and others. Although the plaintiffs have advanced claims under many different legal theories, the essence of their claims appear to be that the Company (including Sofamor and its former U.S. distributor) marketed some of its spinal systems for pedicle fixation in contravention of Food & Drug Administration ("FDA") rules and regulations (governing marketing and labeling), that pedicle fixation has not been 8 9 proven safe and effective in the context of FDA labeling standards, that some or all of the spinal systems are defectively designed and manufactured, and that plaintiffs have suffered a variety of injuries as a result of their physicians' use of such systems in pedicle fixation. The Company has also been named as a defendant in a number of lawsuits instituted by plaintiffs who have received spinal implants manufactured by other manufacturers and in which the Company is alleged to have participated in a conspiracy among doctors, manufacturers, hospitals, teaching institutions, professional societies and others to promote, in violation of applicable law, the use of spinal implants. In a number of cases, plaintiffs have sought to proceed as representatives of classes of spinal implant recipients. All efforts to obtain class certification have been denied or withdrawn. Some plaintiffs have filed individual lawsuits, whereas other lawsuits list multiple plaintiffs and, in certain instances, multiple lawsuits have been filed on behalf of the same individual plaintiffs. Plaintiffs typically seek relief in the form of monetary damages, often in unspecified amounts. Many of the plaintiffs only allege as monetary damages an amount in excess of the jurisdictional minimum for the court in which the case has been filed. A few suits also name as defendants various officers and directors of the Company. To date, approximately two thousand eight hundred fifty (2,850) plaintiffs have joined in lawsuits against the Company. The majority of these plaintiffs filed their claims in 1995. The Company is also named as a defendant in lawsuits involving about two thousand eight hundred (2,800) claimants where the Company is alleged to have conspired with competitors and others illegally to promote the use of spinal implant systems. The Company believes that it has defenses, including, without limitation, defenses based upon the failure of a cause of action to exist where no malfunction of the implant has occurred or the plaintiff has suffered no injury attributable to the Company's product, the expiration of the applicable statute of limitations and the learned intermediary defense. The Company has asserted and will continue to assert these defenses primarily through the filing of dispositive motions. The Company believes that all product liability lawsuits currently pending against it are without merit and will continue to defend them vigorously. FEDERAL MULTIDISTRICT LITIGATION (MDL 1014) On August 4, 1994, the Federal Judicial Panel for Multidistrict Litigation ordered all federal court lawsuits to be transferred to and consolidated for pretrial proceedings, including the determination of class certification, in the United States District for the Eastern District of Pennsylvania in Philadelphia (the "Multidistrict Litigation"). Lawsuits filed in federal court after August 4, 1994, have also been transferred to and consolidated in the Multidistrict Litigation in the Eastern District of Pennsylvania. In addition, a number of lawsuits filed in state courts around the country were removed to federal courts and then transferred into the Multidistrict Litigation. On February 22, 1995, Chief Judge Emeritus, Louis C. Bechtle, denied class certification. A large number of plaintiffs filed individual lawsuits as a result of the denial of class certification. In some instances lawsuits that had been removed and transferred into the Multidistrict Litigation have been remanded to the state courts in which 9 10 they were filed because there was no federal court jurisdiction. Currently, the Company is a defendant in approximately one thousand (1,000) individual claims and one thousand one hundred (1,100) conspiracy claims consolidated in the Multidistrict Litigation. On August 22, 1996, Judge Bechtle dismissed without prejudice plaintiffs' conspiracy claims. Most plaintiffs asserting conspiracy claims in the Multidistrict Litigation have filed amended or new complaints. It is not possible to determine at this time precisely how many of these conspiracy complaints will be reasserted or the number of additional plaintiffs that may file new lawsuits. On April 16, 1997, Judge Bechtle dismissed conspiracy claims alleging fraud on the FDA, but deferred the remaining conspiracy claims for later consideration by the federal trial courts to whom the cases will be remanded for trial. Discovery has been completed in a number of the federal court cases and is continuing in the remainder. It is anticipated that the first cases to be returned for trial to the federal court in which they were filed will be remanded beginning in August 1997. It is not now possible to determine when the first federal court cases will be tried. STATE COURT LITIGATION A number of cases filed in state courts were not eligible for removal and transfer into the Multidistrict Litigation. Currently, there are approximately eighteen hundred and fifty (1,850) individual claims pending against the Company in several courts around the country, principally in Tennessee, Oklahoma, Texas and Pennsylvania. In addition, there are approximately seventeen hundred (1,700) conspiracy claims pending in state courts. Fifteen hundred and forty-three (1,543) plaintiffs who had joined together in several complaints which had been removed to the Multidistrict Litigation proceedings, have had their cases remanded to the state court in Memphis, Tennessee, where they were originally filed when it was determined that the federal court lacked jurisdiction over their claims. The presiding state court judge in Memphis has established a case management plan which calls for the preparation of eight representative cases for pretrial preparation and trial. Discovery is proceeding in all remaining state court cases. Some state cases have been given trial dates in 1997. It is anticipated that a number of other state court cases around the country may be scheduled for trial in 1997, although delays in trial dates are common. Trials in the Memphis proceedings are scheduled to commence in January of 1998. ACROMED CORPORATION PROPOSED SETTLEMENT In December 1996, AcroMed Corporation ("AcroMed"), a spinal implant manufacturer and a defendant in many of the cases pending in the Multidistrict Litigation, and the Plaintiff's Legal Committee in the Multidistrict Litigation announced that they had entered into a conditional settlement regarding all product liability claims involving the use of AcroMed devices to achieve pedicular fixation with screws in spinal fusion surgery. Under the terms of the proposed settlement, AcroMed will establish a settlement fund consisting of $100 million in cash and the proceeds of its product liability insurance policies. In January 1997, 10 11 the parties submitted a formal class settlement agreement and related documentation for approval by Judge Bechtle. Hearings began on April 23, 1997 to consider certification of a settlement class and the fairness, adequacy and reasonableness of the settlement. Further hearings are expected. All federal court proceedings involving AcroMed devices have been stayed pending final consideration of the proposed settlement. A number of objections to the settlement have been filed with the Court. INSURANCE All of the insurance carriers for policy periods in which these claims have been made have asserted reservation of rights, but have not denied coverage to the Company. To date, the cost of defending these claims has been reimbursed by certain of the primary and excess carriers, and the Company is actively engaged in discussions concerning the recovery of amounts currently due and owing from all other carriers. The Company believes that these receivables are recoverable under the terms of the Company's policies. The Company's insurance policies are reduced by the costs of defense, except for a policy issued by Royal Surplus Lines Insurance Co. ("Royal") covering the 12-month period that began in November 1995. The Company estimates that the litigation may continue for several years and, if so, the cost to defend and conclude these lawsuits is likely to exhaust its insurance coverage. An insurer, Royal, providing coverage for the 12-month period commencing in November 1995, brought an action in early December 1996 in the Federal District Court for the Middle District of Tennessee (Nashville Division) seeking a declaratory judgment as to, among other things, whether the policy covers lawsuits which have been reported to the insurer during the policy period. The Company has moved to dismiss or transfer this action to the Federal District Court in Memphis, Tennessee, on the ground that Nashville is not the proper venue for the suit. The Company has also filed its answer and counterclaim in the Royal lawsuit. The Company has initiated its own declaratory judgment action against Royal in the Federal District Court located in Memphis, Tennessee. This action seeks a declaration of coverage and immediate payment of the outstanding balance of amounts due from Royal. Both cases are in preliminary stages. The Company believes that Royal's suit is without merit and will defend it vigorously. As is common in the insurance industry, the Company's insurance policies covering product liability claims must be renewed annually. Although the Company has been able to obtain insurance coverage relating to product liability claims at a cost and on other terms and conditions that are acceptable to the Company, there can be no assurance that in the future it will be able to do so. The Company's 1996 financial results reflect a pre-tax charge relating to costs associated with the product liability litigation described above. The costs provided for include, but are not limited to, legal fees paid or anticipated to be paid and other costs related to the Company's defense and conclusion of these matters. The actual costs to the Company could differ from the estimated charge and will be dependent upon a number of factors that will not be known for some time, including, among 11 12 other things, the resolution of defense motions and the extent of further discovery. Although an adverse resolution of the lawsuits could have a material effect on the Company's results of operations in future periods, the Company does not believe that these matters will in the future have a material adverse effect on its consolidated financial position. The Company is unable to predict the ultimate outcome or the financial impact of the product liability litigation. SECURITIES LAWS ACTIONS Beginning in April 1994, the Company and four of its officers and directors were named in five shareholder lawsuits filed in the United States District Court in Memphis, Tennessee. Four of the lawsuits purport to be class actions. All of the lawsuits were consolidated into one case in the United States District Court in Memphis through an amended complaint which added four new individual defendants who are either current or former directors of the Company. The lawsuit alleges that the defendants made false and misleading statements and failed to disclose material facts to the investing public and seeks money damages. The alleged securities law violations are based on the claim that the defendants failed to disclose that the Company sold its products illicitly, illegitimately and improperly and to timely disclose facts concerning the termination of the former United States distributor of Sofamor products, National Medical Specialties, Inc. ("NMS"). The allegations relating to illicit and illegitimate sales of product are, for the most part, copied from product liability complaints filed against the Company and other manufacturers currently being coordinated in the United States District Court for the Eastern District of Pennsylvania which are referred to above. The allegations of improper sales relate to one of the Company's selling programs which has been publicly disclosed since May 1991. The allegations concerning NMS relate to the termination of the NMS distribution agreement covering Sofamor products in the United States. On October 3, 1995, the United States District Court Judge in Memphis dismissed with prejudice the entire case against the Company and each of the individual defendants. The plaintiffs have appealed the dismissal to the United States Court of Appeals for the Sixth Circuit, which has not yet ruled on this appeal. SPANISH DISTRIBUTOR ACTION In late September 1994, a Magistrate of the Commercial Court in Paris ruled in favor of a former Spanish distributor of Sofamor's products on a claim of wrongful termination of the distribution agreement in 1992. Prior to the Combination, an accrual was established, with a related charge to earnings, for this pending litigation. On the Combination date in June 1993, the Company also established a separate indemnity with respect to potential losses resulting from such lawsuit and placed in escrow shares issued to the former Sofamor shareholders pending the final outcome of this lawsuit. The $3.0 million award (including interest) rendered by the French Magistrate exceeded the pre-established accrual. As a result, the Company recorded an expense of $2.2 million for the non-recurring litigation award during the third and fourth quarters of 1994. The Company filed an appeal which involves a complete retrial on all issues. The former Spanish distributor recently filed its papers in the appeal and seeks additional damages; the Company seeks to have the decision 12 13 of the Commercial Court reversed. A hearing on the appeal is currently scheduled for the fourth quarter of 1997. The Company does not believe the Securities Laws Actions or the Spanish Distributor Action, described above, will have a material adverse effect on its consolidated financial position, results of operations or cash flows because of, among other reasons, the facts and circumstances existing with respect to each action, the Company's belief that these actions are without merit, certain defenses available to the Company and the availability of insurance in the Securities Laws Actions. 13 14 Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION The following table sets forth for the periods indicated selected unaudited financial information expressed as a percentage of revenues and the period-to-period change in such information.
Period-to-Period As a Percentage of Revenues Change ------------------------------- ---------------------- Three Months Ended Three Months Ended March 31, March 31, 1997 1996 1997 vs. 1996 ---------- ---------- ---------------------- Revenues 100.0% 100.0% 28.7% Cost of goods sold 17.7 19.6 16.5 ---------- ---------- Gross profit 82.3 80.4 31.6 Operating expenses: Selling, general and administrative 46.9 47.9 25.8 Research and development 6.8 6.7 30.0 ---------- ---------- Income from operations 28.6 25.8 42.8 Other income 0.1 1.8 (92.2) Interest expense (1.7) (1.4) 51.4 ---------- ---------- Income from operations before provision for and charge in lieu of income taxes 27.0 26.2 33.0 Provision for and charge in lieu of income taxes 7.8 6.6 52.7 ---------- ---------- Income before minority interest 19.2 19.6 26.4 Minority interest (0.9) (0.8) 49.8 ---------- ---------- Net income 18.3% 18.8% 25.4% ========== ==========
RESULTS OF OPERATIONS* The Company reported record first quarter revenues of $69.8 million for the quarter ended March 31, 1997, which represented a $15.5 million, or 28.7%, increase over the first quarter of 1996. An increase in volume comprised 26.6% of the revenue growth. The Company's conversion of certain portions of its international distribution network to direct sales, which resulted in higher selling prices, contributed a 2.6% increase. Other net pricing changes in existing distribution channels resulted in a 2.7% increase in revenues. If exchange rates had been constant, revenues would have reflected an additional 3.2% increase compared with the first quarter of 1996. - ---------- * Except for the historical information contained in this Quarterly Report on Form 10-Q, the matters discussed herein (including, in particular, those discussed in Part II, Item 1, "Legal Proceedings") are forward-looking statements that involve risks and uncertainties, including (without limitation) the timely development and acceptance of new products, the impact of competitive products, the timely receipt of regulatory clearances required for new products, the regulation of the Company's products generally, the disposition of certain litigation involving the Company and certain other risks and uncertainties detailed from time to time in the Company's periodic reports (including the Annual Report on Form 10-K for the year ended December 31, 1996 and the Current Report on Form 8-K dated January 6, 1997) filed with the Securities and Exchange Commission. 14 15 U.S. revenues increased 35.0% to $48.3 million for the quarter ended March 31, 1997, from the same period in 1996. The Company believes the improvement in U.S. revenues is the result of an increased number of instrumented fusions, as well as the acceptance of new products and services such as the STEALTHSTATION(TM) system, the TIMESH(TM) cranial plating system, the MEDNEXT(R) surgical drill system, and services related to the distribution of cortical bone dowel and other allograft bone products. Non-U.S. revenues advanced 16.4% during first quarter 1997, when compared to first quarter 1996. The increase would have been 25.8% if exchange rates had been constant. Higher volume in core and new products was the primary source of the increase in revenues during the first quarter of 1997, compared with the same period of 1996. In addition, the Company's revenues continued to benefit from the direct sales operations which were established in selected countries during 1996. The Company's gross margin improved as a percentage of revenues during the first quarter of 1997 to 82.3% from 80.4% for the same period of 1996. The improvement in gross margin is due to greater leveraging of manufacturing costs due to increased volume, a reduction in the levels of outsourced product manufacturing, higher margins relating to changes in international distribution, and favorable shifts in the sales mix of certain products and sales programs. Selling, general and administrative expenses were 46.9% of revenues in the first quarter of 1997, compared with 47.9% during the same period of 1996. This decrease in selling, general and administrative expenses, expressed as a percentage of revenues, resulted from the leveraging of fixed costs over greater revenue volume, even though higher expenses were incurred related to direct sales operations established in selected countries during 1996. Research and development expenses totaled $4.7 million, or 6.8% of revenues, for the first quarter of 1997, compared with $3.6 million, or 6.7% of revenues, for the first quarter of 1996. The first quarter 1997 dollar spending represents an increase of 30.0% over the same period in 1996. These development and clinical costs are incurred as the Company continues to enhance existing product lines and develop new and complementary products, such as the interbody fusion devices, biological products for use in spinal applications, and products related to frameless stereotactic surgery in the spinal and neurological fields of use. These expenditures demonstrate the Company's continued commitment to the pursuit of applying new medical technologies to product opportunities. The Company reported other income of $76,000 for the quarter ended March 31, 1997, compared with $980,000 for the same period in 1996, which consisted mostly of foreign exchange gains. Interest expense for the first quarter of 1997 was $1.2 million and $777,000 during the same period of 1996. Interest expense was higher during the first quarter of 1997 compared with the prior year due to interest expense on increased borrowings against the Company's credit facilities occurring principally as a result of acquisitions made in 1996. The Company's effective income tax rates were 29.0% and 25.3%, respectively, for the quarters ended March 31, 1997 and March 31, 1996. The difference between the Company's effective and 15 16 statutory tax rates for both 1997 and 1996 resulted primarily from the impact of certain elections made for U.S. tax purposes following the combination (the "Combination") of Danek Group, Inc. with Sofamor S.A. ("Sofamor"), and the subsequent reorganization of Sofamor from a Societe Anonyme (S.A.) under French law to a Societe en Nom Collectif (S.N.C.) in late 1993. Management cannot be certain that such a favorable effective income tax rate will be achieved in future periods, since the effective tax rate calculation is dependent upon the Company's pre-tax income dollar amount. Higher future pre-tax income could lead to higher future effective tax rates. At March 31, 1997, the balance sheet of the Company reflected a net deferred tax asset of $37.6 million. No valuation allowance was recorded since sufficient taxable income exists in available carryback periods to recognize fully these net deferred tax assets. In March 1997, the Financial Accounting Standards Board issued Statement No. 128 "Earnings Per Share" ("FAS 128"). FAS 128 establishes standards for computing and presenting earnings per share ("EPS") and replaces the presentation of primary EPS with a presentation of basic EPS. It also requires dual presentation of basic and diluted EPS on the face of the statement of operations and requires a reconciliation of the numerator and the denominator of the basic EPS computation to the numerator and the denominator of the diluted EPS computation. The Company will adopt the disclosure requirements of FAS 128 beginning December 31, 1997. The Company does not expect the adoption of FAS 128 to have a material impact on earnings per share when presented on a comparable basis. LIQUIDITY AND CAPITAL RESOURCES Cash generated from operations and the Company's revolving lines of credit are the principal sources of funding available for the growth of the business, including working capital and additions to property, plant and equipment, as well as debt service requirements and required contractual payments. The Company believes that these sources of funding will be sufficient to meet its expected cash needs for the foreseeable future. Cash, cash equivalents and short-term investments totaled $5.2 million at March 31, 1997, compared with $2.9 million at December 31, 1996. The Company's working capital increased by $14.9 million during the first quarter of 1997. The increase in working capital resulted primarily from operations. Accounts receivable increased $4.5 million from December 31, 1996, due principally to the increase in revenues. Inventories and loaner set inventories increased by $9.5 million from year-end due mostly to stocking levels required for recently formed subsidiaries and the manufacture of loaner set inventories in preparation for new sales and marketing programs. Other receivables, which consisted primarily of amounts recoverable from insurance carriers relating to the expenses incurred in connection with product liability litigation, increased $3.4 million from the Company's previous year-end. In connection with the Company's 1995 license agreement with Genetic's Institute, which resulted in a special charge of $45.3 million, the Company had a remaining liability of $23.0 million at March 31, 1997. This liability represents the present value of the $25.0 million in remaining scheduled payments. Of this amount, $7.0 million is classified as long-term debt and 16 17 $16.0 million is reflected as a current liability, representing the principal portion of the $17.5 million payable on June 30, 1997. The final payment of $7.5 million is due in June of 1998. The purchase agreements for two of the acquisitions made by the Company in 1996 contain provisions which provide for contingent payments to the former shareholders of each entity based upon certain calculations relative to revenues and earnings, as defined, through 1999. Such payments will be reflected as purchase price adjustments. During 1996, the Company recorded an adjustment to the purchase price of one of these acquisitions of $4.2 million. This amount was paid during April of 1997. The Company is unable to determine whether such payments will be required for the years 1997 through 1999. During 1996, the Company recorded a special product liability litigation charge of $50.0 million. This charge was recorded in order to recognize the reasonably anticipated costs associated with the defense and conclusion of certain product liability cases in which the Company is named as defendant. At March 31, 1997, the balance sheet of the Company reflected a long-term liability of $47.0 million and the current portion of this liability was included in accrued expenses. Additions to property, plant and equipment during the first quarter of 1997 of $1.5 million were related to capital asset expenditures necessary to support the Company's manufacturing and distribution operations. The Company is in need of additional office and distribution space at its Memphis location. Management has entered into an agreement whereby the Company will lease a new facility adjacent to its existing headquarters. This lease will be accounted for under Statement of Financial Accounting Standards No. 13, "Accounting for Leases," as an operating lease. The Company has committed lines of credit totaling approximately $73.7 million. At March 31, 1997, $57.4 million was outstanding under the Company's committed lines of credit and other short-term borrowings. The committed lines of credit consist primarily of a $60.0 million uncollateralized revolving line of credit with a U.S. bank which is renewable annually and matures on October 15, 1997. The Company has the option to convert the debt outstanding under this revolving line of credit to a term loan, amortized on a quarterly basis over a term of up to three years. The Company invests available funds in short-term investment grade instruments, certificates of deposit or direct or guaranteed obligations of the United States of America. These short-term investments are available to fund the Company's working capital requirements and acquisitions of capital assets. FACTORS THAT MAY AFFECT FUTURE OPERATING RESULTS AND FINANCIAL CONDITION The Company's future operating results and financial condition are subject to risks and uncertainties, including (without limitation) the following matters: Regulatory Clearances. The Company manufactures devices that are subject to the regulations of the FDA and, in some cases, to the regulations of foreign governmental authorities. In 17 18 particular, such devices are subject to marketing clearance by the FDA before sales can be made in the United States. The process of obtaining marketing clearances can be time consuming, and there can be no assurance that all necessary clearances will be granted to the Company with respect to new devices or that the FDA review will not involve delays adversely affecting the marketing and sale of new products and devices by the Company. The enforcement of FDA regulations depends heavily on administrative interpretation, and there can be no assurance that future interpretations made by the FDA or other regulatory bodies, with possible retroactive effect, will not adversely affect the Company. The Company cannot predict the extent or impact of future foreign, federal, state or local legislation or regulation. Potential Impact of Health Care Cost Containment Proposals on Profitability. In recent years, the cost of health care has risen significantly, and there have been numerous proposals by legislators, regulators and third party health care payers to curb these cost increases in the United States and Europe. Some of these proposals have involved limitations on the amount of reimbursement for specific surgical procedures. These proposals have been adopted in some cases. The Company is unable to predict what changes will be made in the reimbursement methods utilized by third-party health care payers. In addition, hospitals and other health care providers have become increasingly cost sensitive. To date, the Company does not believe that such health care cost containment proposals have negatively affected the profitability or growth of its business; however, the Company is not able to predict the future effect of these proposals on its business. Product Obsolescence. Spinal implant and other devices are subject to continuous improvements and modifications and typically are rendered obsolete within a few years. Success, therefore, requires any medical device company to devote substantial resources to continued product development. The Company maintains active research and development programs and has been successful in developing or acquiring new products in the past. There can be no assurance that the Company will be able to develop and introduce or acquire new products that will enable it to remain competitive in the future. Product Liability; Insurance. In recent years, physicians, hospitals, and other participants in the health care industry have become subject to an increasing number of lawsuits alleging malpractice, product liability or asserting related legal theories, many of which involve large claims and significant defense costs. The Company currently maintains liability insurance intended to cover such claims, although there can be no assurance that the coverage limits of such insurance policies will be adequate or that all amounts will ultimately be collected from each insurer providing the applicable policy. Such insurance is expensive, difficult to obtain and may not be available in the future on acceptable terms or at all. The Company is currently involved in product liability litigation. (See Note 5 to the Consolidated Financial Statements.) There can be no assurance that additional claims will not be asserted against the Company in the future. A successful future claim or aggregation of future claims brought against the Company in excess of insurance coverage could have a material adverse effect upon the financial condition, results of operations and/or cash flows of the Company. Claims against the Company, regardless of their merit or eventual outcome, may also have a material adverse effect upon the reputation and business of the Company. 18 19 Competition. Worldwide, there are a number of firms producing spinal implant devices. The Company currently competes with a number of firms with financial, marketing and technical resources comparable to or greater than those of the Company. Because of the growth of the number of spinal fusion procedures performed in recent years, a number of companies, including those active in producing various orthopaedic and neurological products and having financial, marketing and technical resources significantly greater than those of the Company, have begun producing spinal implant devices. The Company anticipates that additional companies may also begin such production. Retention of Personnel. The Company is highly dependent upon its senior management, and the competition for qualified management personnel is intense. The loss of key personnel or an inability to attract, retain and motivate such persons could adversely affect the business and prospects of the Company. There can be no assurance that the Company will be able to retain its existing senior management personnel or to attract additional qualified personnel if needed. The Company also depends on its contractual relationships with certain physicians for product ideas, research and advice. There can be no assurance that the Company will be able to maintain and develop such relationships. Global Market Risks. A significant portion of the Company's revenue is derived from its international operations. As a result, the Company's operations and financial results could be affected by international factors, such as changes in foreign currency exchange rates or weak economic conditions in the foreign markets in which the Company distributes its products. Intellectual Property. The Company is dependent on its proprietary intellectual property and attempts to protect such intellectual property through patents, licensing, trade secrets and proprietary know-how. In the medical device industry, challenges by third parties regarding intellectual property rights occur frequently. Such challenges may result in litigation which is often complex and expensive. There can be no assurance that the Company's proprietary rights will not be challenged, rendered unenforceable or circumvented and that pending or future patent or trademark applications will be granted. 19 20 PART II -- OTHER INFORMATION Item 1. LEGAL PROCEEDINGS The Company is involved from time to time in litigation on various matters which are routine to the conduct of its business, including product liability and intellectual property cases. PRODUCT LIABILITY LITIGATION Beginning in 1994, the Company and other spinal implant manufacturers were named as defendants in a number of product liability lawsuits brought in various federal and state courts around the country. These lawsuits allege that plaintiffs were injured by spinal implants manufactured by the Company and others. Although the plaintiffs have advanced claims under many different legal theories, the essence of their claims appear to be that the Company (including Sofamor and its former U.S. distributor) marketed some of its spinal systems for pedicle fixation in contravention of Food & Drug Administration ("FDA") rules and regulations (governing marketing and labeling), that pedicle fixation has not been proven safe and effective in the context of FDA labeling standards, that some or all of the spinal systems are defectively designed and manufactured, and that plaintiffs have suffered a variety of injuries as a result of their physicians' use of such systems in pedicle fixation. The Company has also been named as a defendant in a number of lawsuits instituted by plaintiffs who have received spinal implants manufactured by other manufacturers and in which the Company is alleged to have participated in a conspiracy among doctors, manufacturers, hospitals, teaching institutions, professional societies and others to promote, in violation of applicable law, the use of spinal implants. In a number of cases, plaintiffs have sought to proceed as representatives of classes of spinal implant recipients. All efforts to obtain class certification have been denied or withdrawn. Some plaintiffs have filed individual lawsuits, whereas other lawsuits list multiple plaintiffs and, in certain instances, multiple lawsuits have been filed on behalf of the same individual plaintiffs. Plaintiffs typically seek relief in the form of monetary damages, often in unspecified amounts. Many of the plaintiffs only allege as monetary damages an amount in excess of the jurisdictional minimum for the court in which the case has been filed. A few suits also name as defendants various officers and directors of the Company. To date, approximately two thousand eight hundred fifty (2,850) plaintiffs have joined in lawsuits against the Company. The majority of these plaintiffs filed their claims in 1995. The Company is also named as a defendant in lawsuits involving about two thousand eight hundred (2,800) claimants where the Company is alleged to have conspired with competitors and others illegally to promote the use of spinal implant systems. The Company believes that it has defenses, including, without limitation, defenses based upon the failure of a cause of action to exist where no malfunction of the implant has occurred or the plaintiff has suffered no injury attributable to the Company's product, the expiration of the applicable statute of limitations and the learned intermediary defense. The Company has 20 21 asserted and will continue to assert these defenses primarily through the filing of dispositive motions. The Company believes that all product liability lawsuits currently pending against it are without merit and will continue to defend them vigorously. FEDERAL MULTIDISTRICT LITIGATION (MDL 1014) On August 4, 1994, the Federal Judicial Panel for Multidistrict Litigation ordered all federal court lawsuits to be transferred to and consolidated for pretrial proceedings, including the determination of class certification, in the United States District for the Eastern District of Pennsylvania in Philadelphia (the "Multidistrict Litigation"). Lawsuits filed in federal court after August 4, 1994, have also been transferred to and consolidated in the Multidistrict Litigation in the Eastern District of Pennsylvania. In addition, a number of lawsuits filed in state courts around the country were removed to federal courts and then transferred into the Multidistrict Litigation. On February 22, 1995, Chief Judge Emeritus, Louis C. Bechtle, denied class certification. A large number of plaintiffs filed individual lawsuits as a result of the denial of class certification. In some instances lawsuits that had been removed and transferred into the Multidistrict Litigation have been remanded to the state courts in which they were filed because there was no federal court jurisdiction. Currently, the Company is a defendant in approximately one thousand (1,000) individual claims and one thousand one hundred (1,100) conspiracy claims consolidated in the Multidistrict Litigation. On August 22, 1996, Judge Bechtle dismissed without prejudice plaintiffs' conspiracy claims. Most plaintiffs asserting conspiracy claims in the Multidistrict Litigation have filed amended or new complaints. It is not possible to determine at this time precisely how many of these conspiracy complaints will be reasserted or the number of additional plaintiffs that may file new lawsuits. On April 16, 1997, Judge Bechtle dismissed conspiracy claims alleging fraud on the FDA, but deferred the remaining conspiracy claims for later consideration by the federal trial courts to whom the cases will be remanded for trial. Discovery has been completed in a number of the federal court cases and is continuing in the remainder. It is anticipated that the first cases to be returned for trial to the federal court in which they were filed will be remanded beginning in August 1997. It is not now possible to determine when the first federal court cases will be tried. STATE COURT LITIGATION A number of cases filed in state courts were not eligible for removal and transfer into the Multidistrict Litigation. Currently, there are approximately eighteen hundred and fifty (1,850) individual claims pending against the Company in several courts around the country, principally in Tennessee, Oklahoma, Texas and Pennsylvania. In addition, there are approximately seventeen hundred (1,700) conspiracy claims pending in state courts. Fifteen hundred and forty-three (1,543) plaintiffs who had joined together in several complaints which had been removed to the Multidistrict Litigation proceedings, have had their cases remanded to the state court in Memphis, Tennessee, where they were originally filed when it was determined that the federal court lacked jurisdiction over their claims. The presiding state court 21 22 judge in Memphis has established a case management plan which calls for the preparation of eight representative cases for pretrial preparation and trial. Discovery is proceeding in all remaining state court cases. Some state cases have been given trial dates in 1997. It is anticipated that a number of other state court cases around the country may be scheduled for trial in 1997, although delays in trial dates are common. Trials in the Memphis proceedings are scheduled to commence in January of 1998. ACROMED CORPORATION PROPOSED SETTLEMENT In December 1996, AcroMed Corporation ("AcroMed"), a spinal implant manufacturer and a defendant in many of the cases pending in the Multidistrict Litigation, and the Plaintiff's Legal Committee in the Multidistrict Litigation announced that they had entered into a conditional settlement regarding all product liability claims involving the use of AcroMed devices to achieve pedicular fixation with screws in spinal fusion surgery. Under the terms of the proposed settlement, AcroMed will establish a settlement fund consisting of $100 million in cash and the proceeds of its product liability insurance policies. In January 1997, the parties submitted a formal class settlement agreement and related documentation for approval by Judge Bechtle. Hearings began on April 23, 1997 to consider certification of a settlement class and the fairness, adequacy and reasonableness of the settlement. Further hearings are expected. All federal court proceedings involving AcroMed devices have been stayed pending final consideration of the proposed settlement. A number of objections to the settlement have been filed with the Court. INSURANCE All of the insurance carriers for policy periods in which these claims have been made have asserted reservation of rights, but have not denied coverage to the Company. To date, the cost of defending these claims has been reimbursed by certain of the primary and excess carriers, and the Company is actively engaged in discussions concerning the recovery of amounts currently due and owing from all other carriers. The Company believes that these receivables are recoverable under the terms of the Company's policies. The Company's insurance policies are reduced by the costs of defense, except for a policy issued by Royal Surplus Lines Insurance Co. ("Royal") covering the 12-month period that began in November 1995. The Company estimates that the litigation may continue for several years and, if so, the cost to defend and conclude these lawsuits is likely to exhaust its insurance coverage. An insurer, Royal, providing coverage for the 12-month period commencing in November 1995, brought an action in early December 1996 in the Federal District Court for the Middle District of Tennessee (Nashville Division) seeking a declaratory judgment as to, among other things, whether the policy covers lawsuits which have been reported to the insurer during the policy period. The Company has moved to dismiss or transfer this action to the Federal District Court in Memphis, Tennessee, on the ground that Nashville is not the proper venue for the suit. The Company has also filed its answer and counterclaim in the Royal lawsuit. The Company has initiated its own declaratory judgment action against Royal in the Federal District Court located in Memphis, Tennessee. This action seeks a declaration of coverage and immediate payment of the outstanding balance of amounts 22 23 due from Royal. Both cases are in preliminary stages. The Company believes that Royal's suit is without merit and will defend it vigorously. As is common in the insurance industry, the Company's insurance policies covering product liability claims must be renewed annually. Although the Company has been able to obtain insurance coverage relating to product liability claims at a cost and on other terms and conditions that are acceptable to the Company, there can be no assurance that in the future it will be able to do so. The Company's 1996 financial results reflect a pre-tax charge relating to costs associated with the product liability litigation described above. The costs provided for include, but are not limited to, legal fees paid or anticipated to be paid and other costs related to the Company's defense and conclusion of these matters. The actual costs to the Company could differ from the estimated charge and will be dependent upon a number of factors that will not be known for some time, including, among other things, the resolution of defense motions and the extent of further discovery. Although an adverse resolution of the lawsuits could have a material effect on the Company's results of operations in future periods, the Company does not believe that these matters will in the future have a material adverse effect on its consolidated financial position. The Company is unable to predict the ultimate outcome or the financial impact of the product liability litigation. SECURITIES LAWS ACTIONS Beginning in April 1994, the Company and four of its officers and directors were named in five shareholder lawsuits filed in the United States District Court in Memphis, Tennessee. Four of the lawsuits purport to be class actions. All of the lawsuits were consolidated into one case in the United States District Court in Memphis through an amended complaint which added four new individual defendants who are either current or former directors of the Company. The lawsuit alleges that the defendants made false and misleading statements and failed to disclose material facts to the investing public and seeks money damages. The alleged securities law violations are based on the claim that the defendants failed to disclose that the Company sold its products illicitly, illegitimately and improperly and to timely disclose facts concerning the termination of the former United States distributor of Sofamor products, National Medical Specialties, Inc. ("NMS"). The allegations relating to illicit and illegitimate sales of product are, for the most part, copied from product liability complaints filed against the Company and other manufacturers currently being coordinated in the United States District Court for the Eastern District of Pennsylvania which are referred to above. The allegations of improper sales relate to one of the Company's selling programs which has been publicly disclosed since May 1991. The allegations concerning NMS relate to the termination of the NMS distribution agreement covering Sofamor products in the United States. On October 3, 1995, the United States District Court Judge in Memphis dismissed with prejudice the entire case against the Company and each of the individual defendants. The plaintiffs have appealed the dismissal to the United States Court of Appeals for the Sixth Circuit, which has not yet ruled on this appeal. 23 24 SPANISH DISTRIBUTOR ACTION In late September 1994, a Magistrate of the Commercial Court in Paris ruled in favor of a former Spanish distributor of Sofamor's products on a claim of wrongful termination of the distribution agreement in 1992. Prior to the Combination, an accrual was established, with a related charge to earnings, for this pending litigation. On the Combination date in June 1993, the Company also established a separate indemnity with respect to potential losses resulting from such lawsuit and placed in escrow shares issued to the former Sofamor shareholders pending the final outcome of this lawsuit. The $3.0 million award (including interest) rendered by the French Magistrate exceeded the pre-established accrual. As a result, the Company recorded an expense of $2.2 million for the non-recurring litigation award during the third and fourth quarters of 1994. The Company filed an appeal which involves a complete retrial on all issues. The former Spanish distributor recently filed its papers in the appeal and seeks additional damages; the Company seeks to have the decision of the Commercial Court reversed. A hearing on the appeal is currently scheduled for the fourth quarter of 1997. The Company does not believe the Securities Laws Actions or the Spanish Distributor Action, described above, will have a material adverse effect on its consolidated financial position, results of operations or cash flows because of, among other reasons, the facts and circumstances existing with respect to each action, the Company's belief that these actions are without merit, certain defenses available to the Company and the availability of insurance in the Securities Laws Actions. See Part I, Item 2, "Management's Discussion and Analysis of Results of Operations and Financial Condition--Factors That May Affect Future Operating Results and Financial Condition--Product Liability; Insurance and Intellectual Property." Item 6. EXHIBITS AND REPORTS ON FORM 8-K a) Exhibit No. Description 27 Financial Data Schedule (For SEC use only) b) Reports on Form 8-K 1. Announcement that financial results for the year ended December 31, 1996, will include a pre-tax charge of approximately $50 million relating to costs associated with the product liability lawsuits in which the Company is a defendant. 24 25 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. SOFAMOR DANEK GROUP, INC. (Registrant) DATE: May 8, 1997 BY: /s/ E.R. Pickard --------------------- --------------------------------- E.R. Pickard Chairman, Chief Executive Officer and Director (Principal Executive Officer) DATE: May 8, 1997 BY: /s/ Laurence Y. Fairey --------------------- -------------------------------- Laurence Y. Fairey Executive Vice President and Chief Financial Officer (Principal Financial Officer) 25 EX-27 2 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE FINANCIAL STATEMENTS OF SOFAMOR DANEK FOR THE THREE MONTHS ENDED MARCH 31, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 3-MOS DEC-31-1997 JAN-01-1997 MAR-31-1997 5,083 72 76,103 1,605 57,085 166,861 45,539 20,819 337,069 120,819 12,297 0 0 57,813 96,346 337,069 68,484 69,759 12,370 12,370 4,730 70 1,176 18,861 5,470 12,774 0 0 0 12,774 0.48 0.48
-----END PRIVACY-ENHANCED MESSAGE-----